Association for Public Policy Analysis & Management

Background.Financial shocks, such as periods of unemployment or unexpected large expenses, are common occurrences in US households (Babiarz & Robb, 2014; Pew Charitable Trusts, 2015). A lack of liquid financial assets puts households – especially low-to-moderate income (LMI) households - at greater risk for material hardship in the wake of these shocks (McKernan et al., 2009; Pew Charitable Trusts, 2015), while Gjertson (2016) found that saving for emergencies was associated with less risk for material hardship in LMI households. The degree to which liquid financial assets reduces hardship risk in LMI households may vary by race, however, due to the persistence of a racial wealth gap (Shapiro et al., 2013).

Methods.The analytic sample was comprised of 6,611 low-to-moderate income (LMI) adults drawn from a sample of tax filers enrolled in the Refund-to-Savings experiment. Data came from administrative tax records and baseline and six-month follow-up Household Financial Surveys. Structural equation modeling (SEM) with propensity score-weighted covariance control for the exogenous variable, and using a maximum likelihood estimator to correct for non-normality and robust standard errors was used to examine the role of liquid assets in mediating the relationship between financial shocks (exogenous variable) and material hardship (endogenous variable). Group comparisons using Sattora-Bentler scaled chi-square difference tests was used to determine whether race/ethnicity moderated the relationship between shocks and hardship as mediated by liquid assets.

Results. Each additional financial shock was associated with an increase in material hardship events (β = .234, p < .001). Most (75.3%) of the effect of financial shocks on material hardship is direct, while 24.7% of this effect is indirect via liquid assets as a mediator. A final model with moderated mediation effects among race groups achieved excellent fit to the dataset (RMSEA = .051, [90% CI] = .045, .056; CFI = .936). The relationship between financial shocks and hardship was similar for White, Black, Asian, and Latino respondents. However, the indirect relationship between shocks and hardship through liquid assets was less (11.6%) among Black respondents, compared to White (19.7%), Latino (14.8%), and Asian and other (32.4%) respondents.

Implications. Among Black households, liquid assets do not cushion the impact of financial shocks on material hardship as greatly as for other households. Policy strategies aimed at building assets such as emergency savings among LMI households may not benefit Black LMI households as much as other LMI households. Other factors such as differential access to and interactions with housing, financial service, and labor markets may account for why liquid assets play less of role among Black compared to other race/ethnicity LMI households in blunting the adverse impact of financial shocks.